Kazakhstan’s Crypto Miners Face New Regulations After Contributing to Power Shortages

Kazakhstan’s energy grid is coming apart at the seams because of the massive influx of bitcoin miners. But that might turn out to be a blessing in disguise as the government and industry look for a response that won’t decimate the industry.

The Central Asian country’s share of the global hashrate – the amount of computer processing power spent mining bitcoin – roughly doubled since May, when Chinese miners, banished from their own country, started moving operations overseas.

Kazakhstan is now dealing with electricity shortages, a problem that was hard to anticipate in an energy-rich country that normally has excess electricity. Government officials have blamed the issues on the influx of miners.

In response, the national grid operator KEGOC is rationing electricity provided to mines, and the Ministry of Energy has proposed a law that would introduce limits for any newly licensed cryptocurrency mines to 1 megawatt (MW) per mine and 100MW for the entire country.

Despite these regulatory moves, five crypto miners with operations in Kazakhstan told CoinDesk that they remain hopeful: In their view, the government is just trying to deal with the pressing electricity shortages, but remains friendly towards mining.

More than that, some of them think that the influx of Chinese miners will empower Kazakhstan to deal with age-old problems in its electricity sector, including outdated infrastructure and a reliance on coal.

On Nov. 10, the energy minister called on them to look for green energy solutions to the electricity conundrum.

Read more: Kazakhstan Won’t Restrict Electricity to Lawful Crypto Miners, Minister Says

Despite the energy crisis it has caused, crypto mining “has a good future in Kazakhstan,” in part “because the government wants to support renewable energy power production,” said Denis Rusinovich, co-founder of CMG Cryptocurrency Mining Group and Maverick Group.

Kazakhstan, the largest country in Central Asia, sits on some of the world’s largest deposits of oil, natural gas, coal and uranium. It is a net energy exporter because it produces more than it can absorb.

But when Chinese miners set up shop in Kazakhstan, they took up any excess capacity and the surplus disappeared, said two crypto miners with operations in Kazakhstan, a representative for Kazakhstan’s largest mine hosting firm Enegix, Rusinovich and Didar Bekbau, co-founder of Kazakh mining firm Xive.io.

Read more: Banished Chinese Bitcoin Miners Look to the West, and Far Beyond

In a Nov. 4 interview with local news outlet Tengrin News, Minister of Energy Magzum Myrzagaliev said that Kazakhstan’s electricity demand had been steadily growing by 1%-2% annually until about 10 months ago. Starting 2021, demand has grown 8%, or about 1,000MW-1,200MW, which Myrzagaliev said was due to crypto mining.

This lack of electricity quickly became a problem for the national grid, with Almaty, the former capital and largest city in Kazakhstan, suffering a total blackout in mid-July.

The shortages are expected to worsen as winter approaches, when demand usually rises for heat. Kazakhstan’s winter temperature averages between -9°C and -12°C, according to the World Bank’s Climate Knowledge Portal.

To deal with the shortage, KEGOC started cutting off electricity to some miners in September, particularly in the southern part of the country.

Bekbau said one of their mines in the south has been shut down whilst others are facing electricity rationing. Rusinovich said the longest shutdown he is aware of lasted two days and occurred around mid-October. The Enegix representative said their mines are facing electricity restrictions during peak hours for about four to six hours per day.

The rationing not only applies to crypto mines. KEGOC announced planned outages for various consumers in October. But miners are a low priority to the government, so when there is a shortage, they are the first ones in the line of fire, Bekbau said.

The south is particularly vulnerable because it isn’t home to power plants. Electricity is mainly generated in the north part of the country, close to Kazakhstan’s rich coal deposits. Out of Kazakhstan’s 21,000MW of installed electricity capacity in 2017, more than half came from coal, the overwhelming majority of which was produced in the north, the World Bank said in a 2017 report.

But the Soviet-era national grid is not able to carry the electricity to the south, where installed capacity is scarce, Rusinovich and Bekbau said.

However, two other miners who wished not to be identified for this article because they weren’t authorized to speak on the matter, denied facing any forced electricity shutdowns.

The power restrictions come with a cleanup operation, whereby the government is trying to crack down on unauthorized mines that tap into the national grid without the right approval from authorities, including KEGOC.

Increasing numbers of illegal miners have contributed to the electricity deficit, Enegix CEO Yerbolsyn Sarsenov told CoinDesk in a statement.

KEGOC did not respond to CoinDesk’s request for comment on this article.

Energy minister Myrzagaliev blamed the electricity shortages on the influx of miners. According to the minister, gray miners in Kazakhstan consume 340MW of electricity, vis-a-vis 600MW consumed by lawful mining operations, he said in an interview with Tengrin News.

But the capacity going to gray mines is hard to estimate and might be as high as 1,000MW-1,200MW, Vice Minister Zhurebekov told Tengrin News.

President Kassym-Jomart Tokayev instructed the energy minister to quickly set up a regulatory framework which would allow existing “white” miners to continue their work without additional restrictions, according to an Oct. 29 meeting readout.

On Oct. 1, the Ministry of Energy issued a draft law that called on limiting the total electricity capacity going towards new mines to 100MW for the whole country, and 1MW per mine, for a period of two years.

The bill is set to take effect 60 days after it is published, but in the meantime it is open for public comments and could be altered.

All miners that CoinDesk spoke to agreed that the restrictions wouldn’t apply to existing mines. “The bill proposes to limit the permits given to new miners,” so it will not affect existing mines, said Enegix’s Sarsenov.

On Nov. 10, at a meeting with crypto industry representatives, Myrzagaliev confirmed that lawful mines that have been properly registered with authorities won’t be subject to restrictions.

When setting up crypto mines, companies usually sign long-term contracts with energy providers, in this case mostly KEGOC, locking up electricity prices for months or years. They have to follow a cumbersome process to get approval for their industrial energy use. It would be extremely difficult for the law to reverse existing contracts that have been signed following the correct procedures, people familiar with the process agreed.

But those that were working on new projects or had projects under construction are “waiting with crossed fingers” Bekbau said.

“I am open to dialogue,” Myrzagaliev said after a meeting with the crypto mining industry representatives.

After the consultation process, the final bill might include some exemptions to the 100MW limit that could create more leeway to build new mines. Some of these exemptions would push the country’s transition into renewable energy by encouraging miners to build their own green energy production capacity.

The law could require that miners have to build out their own renewable energy production capacity to match what they consume from the national grid, Bekbau said, or could exempt miners that use green or imported energy from the hard cap, Rusinovich said.

During the Nov. 10 meeting with the Ministry of Energy, miners noted that they are “ready to” import power from overseas and invest in renewable energy.

Enegix announced it plans to achieve energy autonomy using hydropower plants on Nov. 9. The company will start building plants to harvest energy from rivers in the first quarter of 2022.

Read more: Kazakh Mining Hosting Firm Enegix Looks for Energy Autonomy Through Hydropower

Despite the power rationing and the bill, miners CoinDesk spoke to are hopeful about Kazakhstan’s future in the industry.

In June, Kazakhstan’s president also signed into law a bill under which crypto miners will be taxed 1 Kazakhstani tenge ($0.0023) per kilowatt hour consumed, starting in 2022. Miners see this as a positive development. Taxation means the government is welcoming the industry instead of banning it.

“It looks like the government wants to benefit from the ban in China” to increase its revenue, one source in Kazakhstan said.

The miners CoinDesk spoke to said the shortages reveal existing problems in Kazakhstan’s electricity infrastructure: Back in 2017, when mining saw its first boom in the country, the World Bank was already warning of an impending energy deficit.

The deficit is related to failures of major power plants in northern Kazakhstan, said the CEO of Enegix. When KEGOC announced power rationing across south Kazakhstan, it was responding to the failure of three major coal plants that caused a loss of 1,000MW of capacity.

These failures can be in part attributed to antiquated facilities. Kazakhstan’s energy infrastructure dates back to the Soviet Union. The government has been talking about updating it for a decade, Bekbau said.

With new taxes from miners, and a large new client for KEGOC that consumes a steady amount of electricity, Kazakhstan might update its infrastructure and pivot towards renewables after all.

In the meantime, however, some miners have already left the country, like Russia, Bekbau said. But this only represents a small minority as the rest are waiting for the final version of the bill, he said. Moving out of Kazakhstan is expensive because it is a landlocked country.

Miners who have done their due diligence and followed cumbersome legal procedures to lock up electricity prices and set up legit facilities in the country are unlikely to just pick up and leave, one miner told CoinDesk.

But he said the company is monitoring the regulatory situation and could change future plans for more investment in Kazakhstan.